Longer Foreclosure Timelines Will Further Burden RMBS Investors

Comparative data on servicers of securitized residential mortgage loans show RMBS investors are likely to shoulder higher carrying costs due to long and lengthening completed foreclosure timelines.

At least in the foreseeable future, due to changes in foreclosure regulations “in a number of key states,” according to Moody’s first-quarter 2013 Servicer Dashboard data, new worries will add to industry concerns about “the far more elevated” foreclosure timelines of loans in judicial states.

Going forward, investors should expect timeline increases for nonjudicial states and “at a faster rate than those for judicial states,” said Bill Fricke, a Moody’s senior vice president.

As long as timelines “for pending foreclosure inventory remain significantly longer than those for completed foreclosures,” he said, foreclosure timelines will continue to increase.

Fricke notes, however, it will be temporary. Measures taken by some servicers to bring down “the average age of the loans in their pending foreclosure inventory” will help to slow down the rate of increase in foreclosure timelines.

Florida and several other states in the Northeast are more at risk. The analyst expects foreclosure timelines in these states will continue to lengthen following a trend that started to emerge in the first quarter.

Second-quarter residential mortgage delinquency and foreclosure data reported by the Mortgage Bankers Association confirm his assessment that the foreclosure backlog in these areas remains high and with no quick solution in sight.

Less-than-robust overall economic growth and jobs creation have generated inconsistent improvements, said MBA’s chief economist and SVP of research and economics, Jay Brinkmann, as states with “the weakest economic growth and the most sclerotic foreclosure systems have seen the slowest improvements in delinquency and foreclosure rates.”

At 10.13% on a non-seasonally adjusted basis, the combined percentage of loans at least one payment past due or in foreclosure reached its lowest level in five years. “Most states are at or only slightly above longer-term averages, and some of the worst-hit states are showing improvement,” Brinkmann said.

With 10% of the mortgages somewhere in the process of foreclosure, yet “down considerably from the high of 14.5% two years ago,” Florida is one such example. It leads the country in the rate of foreclosures started, he said, but at 1.1% the rate is the lowest since mid-2007 and half of what it was three years ago.”

As expected, the foreclosure inventory rate either improved or was unchanged in 45 states, while states with a judicial foreclosure system, including Florida, New York, New Jersey and Connecticut, “continue to bear a disproportionate share of the foreclosure backlog,” Brinkmann said.

The percentage of loans in foreclosure dropped disproportionately as the average rate of 5.59% for judicial states is triple the average rate of 1.86% for nonjudicial states. The foreclosure inventory dropped to lowest since 2009 in judicial states and the lowest since 2007 in nonjudicial states.

In New York the rate of new foreclosures hit an all-time high during the second quarter and equal with Florida. The percentage of loans in foreclosure in New Jersey equals the rates in California, Arizona and Nevada combined, and the foreclosure rate in Connecticut is back to its near all-time highs.

Given the fact that court systems in judicial states “remain overwhelmed by the sheer number of cases awaiting processing,” Fricke explained, long foreclosure timelines will continue to burden investors.